2011 (9) TMI 961 - AT - Income Tax

Excess cash received at the cash counters of the branches of the assessee - disallowance of assessee s claim for deduction u/s 36(1)(viia) - disallowance of deduction claimed by the assessee on account of amortization of premium paid for securities held under Held to maturity (HTM) category - Addition on commission, exchange and discount including locker rent - addition on account of interest on Government securities - addition u/s 14A

Issues Involved:
1. Deletion of addition on account of excess cash received at the cash counters.
2. Deletion of disallowance of deduction claimed under section 36(1)(viia).
3. Deletion of disallowance of deduction claimed for amortization of premium paid for securities held under "Held to Maturity (HTM)" category.
4. Deletion of addition on account of commission, exchange, and discount including locker rent.
5. Non-decision on addition of interest on Government securities.
6. Disallowance under section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Excess Cash Received at the Cash Counters:
The Revenue challenged the deletion of an addition of Rs. 3,99,318/- made by the AO, who had treated the excess cash received at the cash counters of the assessee's branches as income. The CIT(Appeals) deleted this addition, following the Tribunal's and its predecessor's orders in earlier years, which treated the excess cash as a liability. Both parties agreed that this issue was covered in favor of the assessee by earlier Tribunal orders and the Bombay High Court's judgment for AYs 2002-03, 2004-05, and 2005-06, which upheld that excess cash did not represent income but a liability. Respectfully following the High Court's decision, the Tribunal upheld the CIT(Appeals)' order and dismissed the Revenue's appeal on this ground.

2. Deletion of Disallowance of Deduction Claimed under Section 36(1)(viia):
The Revenue contested the deletion of a disallowance of Rs. 17,77,96,300/- related to the assessee's claim for deduction under section 36(1)(viia). The AO had disallowed the deduction, arguing that advances made to F.C.I. were not eligible. The CIT(Appeals) deleted the disallowance, following earlier Tribunal orders. Both parties agreed that this issue was covered in favor of the assessee by earlier Tribunal orders and the Bombay High Court's judgment for AYs 2002-03, 2003-04, and 2004-05, which held that provisions for bad and doubtful debts on advances made to F.C.I. through rural branches were eligible for deduction. Respectfully following the High Court's decision, the Tribunal upheld the CIT(Appeals)' order and dismissed the Revenue's appeal on this ground.

3. Deletion of Disallowance of Deduction for Amortization of Premium Paid for Securities Held under HTM Category:
The Revenue challenged the deletion of a disallowance of Rs. 11,77,23,000/- related to the amortization of premium paid for HTM securities. The AO had disallowed the deduction, treating the expenditure as capital in nature. The CIT(Appeals) deleted the disallowance, relying on the Tribunal's earlier orders and CBDT Instruction No. 17/2008, which mandated amortization as per RBI guidelines. Both parties agreed that this issue was covered in favor of the assessee by earlier Tribunal orders. Respectfully following the Tribunal's earlier orders, the Tribunal upheld the CIT(Appeals)' order and dismissed the Revenue's appeal on this ground.

4. Deletion of Addition on Account of Commission, Exchange, and Discount Including Locker Rent:
The Revenue contested the deletion of an addition of Rs. 95,48,979/- related to commission, exchange, and discount, including locker rent received in advance. The AO had taxed this income on a receipt basis, rejecting the assessee's method of accounting on an accrual basis. The CIT(Appeals) deleted the addition, following earlier Tribunal orders. Both parties agreed that this issue was covered in favor of the assessee by the Bombay High Court's judgment for AYs 2002-03 and 2003-04, which upheld the change in the method of accounting as bona fide and consistently followed. Respectfully following the High Court's decision, the Tribunal upheld the CIT(Appeals)' order and dismissed the Revenue's appeal on this ground.

5. Non-decision on Addition of Interest on Government Securities:
The assessee raised a grievance that the CIT(Appeals) did not decide on the addition of Rs. 2,25,24,330/- on account of interest on Government securities. The Tribunal noted this omission and remitted the matter to the CIT(Appeals) for a decision on merit after giving the assessee an opportunity to be heard. Ground No. 1 of the assessee's cross objection was allowed.

6. Disallowance under Section 14A Read with Rule 8D:
The AO made a disallowance of Rs. 47,11,188/- under section 14A, calculating it as 10% of the exempt income. The CIT(Appeals) upheld the disallowance in principle but directed the AO to recompute it using Rule 8D. The Tribunal noted that Rule 8D is applicable only from AY 2008-09, as per the Bombay High Court's decision in Godrej and Boyce Mfg. Co. Ltd., and directed the AO to determine the disallowance using a reasonable method. The Tribunal also directed the AO to consider the Cochin Bench's decision in State Bank of Travancore vs. ACIT. Ground Nos. 2 and 3 of the assessee's cross objection were partly allowed.

Conclusion:
The Revenue's appeal was dismissed, and the assessee's cross objection was partly allowed. The Tribunal upheld the CIT(Appeals)' orders on the deletion of additions and disallowances, following earlier Tribunal and High Court decisions, and remitted the issue of interest on Government securities to the CIT(Appeals) for a decision on merit.

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